The Foreign Service Journal, January-February 2019

74 JANUARY-FEBRUARY 2019 | THE FOREIGN SERVICE JOURNAL AFSA NEWS Military Families Tax Relief Act of 2003 According to the Military Families Tax Relief Act of 2003, the five-year period described above, beginning on the date you first occupy your residence, may be suspended for members of the Foreign Service for any 10-year period during which the taxpayer has been away from the area on a Foreign Service assignment, up to a maximum of 15 total years. Failure to meet all of the requirements for this tax benefit (points (1) through (3) in the Selling a Principal Residence sec- tion above) does not necessarily disqualify the taxpayer from claiming the exclusion. However, the services of a tax profes- sional will probably be necessary if one of these requirements is not met. In addition to the recommended reading from the previous section, AFSA recommends IRC Sec. 121(d)(9) and 26 CFR Sec. 1.121-5. Adjustments & Basis in Your Property Tracking a property’s basis begins with its cost (either to purchase or build). Taxpayers most commonly want to track the basis of their home. This calculation encompasses cash paid, money borrowed to purchase, debt forgiven in lieu of cash given and the fair market value of property or services exchanged as part of the transaction. Associated taxes, commissions and mortgage settlement fees also form part of the initial cost basis. When building, some investments in construction, improvements during ownership and improve- ments over the life of the asset (new rooms and fixed struc- tures like decks, windows, roofs, and siding) must be added to the basis of the home. Basis might be reduced (adjusted downward) for casu- alty losses, outstanding debt forgiven or dispositions of the property. The basis of depreciable property (structures, not land) that has been converted for business use (like renting out a home) must be recovered by depreciation and amor- tization each year. Note the availability of “bonus deprecia- tion” for capital assets used in business, subject to wear and tear, that are acquired from 2018 through the end of 2025. Failing to depreciate still reduces basis at the time of the sale (though the tax benefit of depreciation cannot then be recovered). Capital outlays and expenses of selling the home will also offset any gain from a sale. That gain includes cash and the fair market value of other property received or debt discharged. The legal and financial effects of various home uses, investments and costs can be less than intuitive, which is one reason AFSA recommends the services of a tax pro- fessional. Foreign Service members should track the basis, adjust- ments and financial effects of legal acts like gifting, inheri- tance or business use of major assets (like your home). Read Tax Topic 703, Publication, 551, 1040 Schedule D with instructions, IRC Sections 1011, 1012 and 1014 through 1017 and associated tax regulations beginning at 26 CFR Sec. 1.1012-1. Recent iterations of the annual tax seminar offered by Christine Elsea-Mandojana through the Foreign Service Insti- tute have illustrated how mistakes in tracking basis can result in incorrectly reported gain or loss from the sale of a principal residence. Federal Estate & Gift Taxes In 2018, the first $11.2 million of a decedent’s aggregate estate was exempt from the federal estate tax. That amount will increase to $11.4 million for decedents (up to $22.8 million for the surviving spouse with a portability election on Form 1041) who pass away in 2019. The same amounts would apply to (and are reduced by) lifetime gift-giving over the annual tax-free gift exclusion. The limit on the exclusion for gifts given in 2019 remains $15,000 ($30,000 for gifts split by married couples). Retirement Savings Finally, in 2019 the limit on contributions to 401(k)s and the Thrift Savings Plan will increase to $19,000 for individuals. The limit on IRA contributions will increase to $6,000 per person. Conclusion The 2018 tax year is the first to be affected by the Tax Cuts and Jobs Act of 2017 and administrative reforms by the IRS. Some reforms, such as combining the personal exemption with the standard deduction and augmenting the child tax credit will further improve the W-2 beginning in 2019. Other changes, like adding six new schedules to make good on a campaign promise about filing taxes on a post card, are less exciting and may actually make filing taxes more compli- cated. The effect of all this appears to be an overall reduced tax bill for most Americans and businesses with income taxed in the United States. This occurs in the context of a 2017 bull market, 2018 bear market, improved consumer confidence and a moderate rebalance in the midterm. AFSA hopes the advice and references here educate members as they deter- mine the extent of their tax liability under the current law and as we await further changes in 2019. n